McKenna v. Gammon Gold Inc. et al.
[Indexed as: McKenna v. Gammon Gold Inc.]
94 O.R. (3d) 735
Ontario Superior Court of Justice,
Lax J.
January 6, 2009
Professions — Barristers and solicitors — Conflict of interest — Law firm acting for plaintiff in securities class action against two subsidiaries of banks which retained law firm to act in unrelated consumer debt enforcement proceedings
— Law firm not having disqualifying conflict of interest
— Motion by defendants to disqualify law firm being tactical.
The law firm was acting for the plaintiff in a class action for prospectus misrepresentation and stock option manipulation. Two of the defendant underwriters were subsidiaries of the Bank of Montreal and the TD Bank. The law firm was concurrently retained by the banks to act for them in consumer debt enforcement proceedings and some personal bankruptcy matters.
The defendant underwriters brought a motion to disqualify the law firm on the basis of conflict of interest.
Held, the motion should be dismissed.
The law firm did not have a disqualifying conflict of interest. The moving defendants were not clients or “near clients” of the law firm. It could not be seriously maintained that they were the alter egos of the banks. The moving defendants and the banks were separate and sophisticated business and legal entities that were individually governed and autonomous. The law firm had breached no contractual retainer and was not in breach of the duty of confidentiality. It was fanciful to suggest that in performing its retainers, the law firm gained strategic knowledge of the banks’ practices on risk tolerance, litigation strategy or settlement approach in litigation that could be of any assistance in the prosecution of the class action. There was no compelling reason to impose fiduciary obligations on the law firm to preclude it from representing the plaintiff [page736] and the proposed class in an action against the underwriters as a result of having acted and continuing to act for the banks in unrelated matters. The law firm was among a small number of law firms that were prosecuting securities class actions and had particular and specialized expertise in the investigation of stock option practices of TSX-listed companies. The motion was tactical.
Cases referred to
Canada Life Assurance Co. v. Canadian Imperial Bank of Commerce; First National City Bank of New York, Third Party (1974), 3 O.R. (2d) 70, [1974] O.J. No. 1839, 44 D.L.R.
(3d) 486 (C.A.); Di Genarro v. BMO Nesbitt Burns Inc.,
2007 CarswellOnt 6575; Gregorio v. Intrans-Corp. (1994), 18
O.R. (3d) 527, [1994] O.J. No. 1063, 115 D.L.R. (4th) 200, 72
O.A.C. 51, 15 B.L.R. (2d) 109, 4 M.V.R. (3d) 140, 48 A.C.W.S.
(3d) 68 (C.A.); MacDonald Estate v. Martin, [1990] 3
S.C.R. 1235, [1990] S.C.J. No. 41, 77 D.L.R. (4th) 249, 121
N.R. 1, [1991] 1 W.W.R. 705, J.E. 91-85, 70 Man. R. (2d) 241,
48 C.P.C. (2d) 113, 24 A.C.W.S. (3d) 553; R. v. Neil, [2002]
3 S.C.R. 631, [2002] S.C.J. No. 72, 2002 SCC 70, 218 D.L.R.
(4th) 671, 294 N.R. 201, [2003] 2 W.W.R. 591, J.E.
2002-2002, 6 Alta. L.R. (4th) 1, 317 A.R. 73, 168 C.C.C. (3d)
321, 6 C.R. (6th) 1, 55 W.C.B. (2d) 36; Salomon v. Salomon
& Co. Inc., [1897] A.C. 22, [1895-1899] All E.R. Rep. 33
(H.L.); Strother v. 3464920 Canada Inc., [2007] 2 S.C.R.
177, [2007] S.C.J. No. 24, 2007 SCC 24, 281 D.L.R. (4th) 640,
363 N.R. 123, [2007] 7 W.W.R. 381, J.E. 2007-1152, 241
B.C.A.C. 108, 67 B.C.L.R. (4th) 1, 29 B.L.R. (4th) 175, 48
C.C.L.T. (3d) 1, [2007] 4 C.T.C. 172, 2007 D.T.C. 5273, 2007
D.T.C. 5301, 157 A.C.W.S. (3d) 439, EYB 2007-120234; UCB
Sidac International Ltd. v. Lancaster Packaging Inc., [1993]
O.J. No. 2775, 51 C.P.R. (3d) 449, 43 A.C.W.S. (3d) 1176
(Gen. Div.) Statutes referred to
Bank Act, S.C. 1991, c. 46
Securities Act, R.S.O. 1990, c. S.5
MOTION to disqualify the plaintiff’s law firm.
Earl A. Cherniak, Q.C., and Jasmine T. Akbarali, for plaintiff.
Ronald G. Slaght, Q.C., and Jordan Goldblatt, for defendants BMO Nesbitt Burns Inc., Scotia Capital Inc. and TD Securities Inc.
Laura F. Cooper and C. William Hourigan, for defendants
Gammon Gold Inc., Russell Barwick, Colin P. Sutherland, Dale M. Hendrick, Fred George, Frank Conte, Kent Noseworthy, Canek Rangel, Bradley Langille and Alejandro Caraveo.
[1] LAX J.: — Should a law firm be disqualified when it prosecutes an action against a subsidiary of its client for whom it has acted in unrelated matters? This issue arises here in the context of a securities class action in which the law firm, Siskinds LLP, is prosecuting an action for prospectus misrepresentation and stock options manipulation. The defendants include the underwriting syndicate for the public share offering of the defendant Gammon Gold Inc. Two of the underwriter defendants, BMO Nesbitt Burns Inc. (“Nesbitt”) and TD Securities Inc. [page737] (“TD Securities”), complain that at the time the action was commenced, Siskinds was concurrently retained by the Bank of Montreal (“BMO”) and Toronto Dominion Bank (“TD Bank”) to act for them in consumer debt enforcement proceedings and some personal bankruptcy matters. They submit that this puts Siskinds in a conflict of interest because it is prosecuting an action against its own clients, or against entities whose interests are inextricably entwined with its clients in breach of its retainer and of duties owed to them.
[2] In my view, Siskinds does not have a disqualifying conflict of interest. It has breached no contractual retainer. It is not in breach of the duty of confidentiality as articulated in MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235, [1990] S.C.J. No. 41. It is not offside the “bright line test” proposed by Justice Binnie in R. v. Neil, [2002] 3 S.C.R. 631, [2002] S.C.J. No. 72 for determining the scope of the duty of loyalty. The underwriters and the banks are separate and sophisticated business and legal entities that are individually governed and autonomous. The banks had no reasonable expectation that their subsidiaries would be treated as clients. On the facts of this case, there is no compelling reason to impose fiduciary obligations on Siskinds to preclude it from representing the plaintiff and the proposed class in an action against the underwriters as a result of having acted and continuing to act for the banks in unrelated matters. The motion to disqualify Siskinds is tactical and should be dismissed.
Analysis
[3] Three Supreme Court of Canada decisions provide the basis for a determination of whether a law firm is in a conflict of interest. In MacDonald Estate v. Martin, the Supreme Court addressed the adequacy of measures put in place to prevent the disclosure of confidential client information when a lawyer changes firms; R. v. Neil involved a consideration of the duty of loyalty and an examination of the scope of that loyalty in unrelated client matters; Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177, [2007] S.C.J. No. 24 considered the ongoing duties a lawyer owes to his client after the retainer is complete.
[4] Underlying each of the arguments advanced by the underwriters is the claim that they are clients or “near- clients” of Siskinds because they are subsidiaries of the banks and in the public’s mind, one and the same. They maintain that bringing action against them is the same as suing BMO and the TD Bank, contrary to the duties imposed on lawyers contractually, at common law and under professional codes. [page738]
[5] This proposition can only succeed if one totally disregards the fundamental principle of corporate identity derived from Salomon v. Salomon & Co. Inc., [1897] A.C. 22, [1895-1899] All E.R. Rep. 33 (H.L.). Share ownership is not sufficient to pierce the corporate veil. Even a wholly owned subsidiary is not the alter ego of its parent corporation unless it is nothing more than a conduit used by the parent for some improper purposes. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights: Gregorio v. Intrans-Corp. (1994), 18 O.R. (3d) 527, [1994] O.J. No. 1063 (C.A.), at p. 536 O.R. Where a subsidiary observes its own corporate formalities, has its own directors, its own business and capital, it is not the alter ego of its parent: Canada Life Assurance Co. v. Canadian Imperial Bank of Commerce; First National City Bank of New York, Third Party (1974), 3 O.R. (2d) 70, [1974] O.J. No. 1839 (C.A.), at pp. 84-85 O.R..
[6] It cannot be seriously maintained that Nesbitt and TD Securities are the alter egos of BMO and TD Bank. Each carries on a substantial business with its own employees under the direction of boards of directors that are separate from the banks. The underwriters are registered under the Ontario Securities Act, R.S.O. 1990, c. S.5 as dealers and the banks are publicly traded financial institutions under the federal Bank Act, S.C. 1991, c. 46. They each must comply with the requirements of separate governing legislation. They have chosen to use a marketing approach that links the organizations’ member companies, but there is no evidence that members of the public cannot distinguish between conventional banking and equity underwriting activities or that the public views the banks and the underwriters as one and the same. They have also chosen to create distinct business and legal entities for their member companies. They cannot ignore this separation when it is convenient or provides tactical advantage, but maintain the separation when it is to their advantage to do this: see Di Genarro v. BMO Nesbitt Burns Inc., 2007 CarswellOnt 6575, where BMO took the position that it had no liability for the actions of Nesbitt in an action by investors and was successful in striking the claim against it as disclosing no reasonable cause of action.
[7] BMO and TD Bank are sophisticated entities with access to excellent legal advice and services. They could have but did not seek any restrictions in their retainers with Siskinds and there is no evidence that Siskinds has failed to comply with any term of the retainers. The banks could have but did not make it a requirement of their retainers with Siskinds that they agree not to act against a subsidiary or affiliate. In fact, the TD Bank’s [page739] conflicts policy specifically contemplates that a law firm may both represent and act against the bank in certain circumstances and there are a number of examples where this has occurred.
[8] In certain circumstances, a duty of confidentiality can extend to “near-clients” and non-clients when they have disclosed confidential information to a lawyer in the course of a retainer. The courts have recognized conflicts in these relationships because of the duty to protect confidential information. For example, in UCB Sidac International Ltd. v. Lancaster Packaging Inc., [1993] O.J. No. 2775, 51 C.P.R. (3d) 449 (Gen. Div.), the law firm had taken instructions from the defendant’s principal that could have been used in advancing the position of the plaintiff on some of the issues in the action. The court found that whether or not the defendants were technically “clients” of the law firm, there existed a previous relationship between the law firm and the defendants which was sufficiently related to the retainer from which it was sought to remove the firm that the inference regarding the imparting of confidential information arose and the difficult burden of displacing it was not discharged.
[9] No lawyer at Siskinds has ever acted for the underwriters. Nor has any Siskinds’ lawyer advised either bank on matters relating to securities, due diligence, stock options or class actions. Its retainer is largely in the nature of fixed-fee debt collection that is assigned electronically to law firms on a rotating basis. It has also done some bankruptcy work for TD Bank filing proofs of claim and opposing bankruptcy discharges. At no time has there been any overlap between those who could instruct Siskinds on collection or bankruptcy matters and those who might give instructions on behalf of Nesbitt and TD Securities in this action. In fact, in a 2005 class action that Siskinds prosecuted against the same underwriters, no conflict was asserted because the underwriters’ lawyers did not know about Siskinds’ retainers. There is no realistic possibility that Siskinds received or could have received confidential information that is relevant to this action in the course of these retainers. It is fanciful to suggest that in performing its retainers, Siskinds gained strategic knowledge of the banks’ practices on risk tolerance, litigation strategy or settlement approach in litigation that could be of any assistance in the prosecution of this class action. To the question “is there a disqualifying conflict of interest?” the answer must be no. [page740]
[10] Is there a breach of the duty of loyalty? In Neil, Binnie J. provided a bright-line test and general rule for determining the scope of the duty of loyalty, at para. 29:
The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interest of another current client
— even if the two mandates are unrelated — unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer responsibly believes that he or she is able to represent each client without adversely affecting the other.
(Emphasis in original)
[11] While there may be situations where the duty of loyalty will require that a lawyer not act against an affiliate to protect the relationship with the client, this is not one. After the conflict was raised and Siskinds refused to withdraw, the banks informed Siskinds that it would not be receiving any further work. This is a business decision that the banks were free to make. However, it is telling that they did not remove their existing files. If the banks had any real concern about Siskinds’ loyalty to them or the impairment of their solicitor- client relationship, they would have terminated the retainers. Instead, they continue despite Siskinds’ refusal to withdraw from its representation of the plaintiff in this action.
[12] In Neil, Justice Binnie recognized that in exceptional cases the consent of the client can be inferred because certain kinds of organizations such as governments, chartered banks and other “professional litigants” accept that lawyers who do their work will act against them in unrelated matters and that a contrary position in a particular case may be seen as tactical rather than principled (at para. 28). Whether or not the banks have impliedly given their consent, I view the position they take as tactical.
[13] In Strother, Justice Binnie referred, at para. 36, to the “objectionable practice” of asserting a claim of conflict for purely tactical reasons, reminding us that this was criticized in Neil in the paragraphs below because of the need to protect the integrity of the justice system, which includes the right of a litigant not to be deprived of counsel of choice without good cause. He said in part [at paras. 14-15]:
If a litigant could achieve an undeserved tactical advantage over the opposing party by bringing a disqualification motion or seeking other “ethical” relief using “the integrity of the administration of justice” merely as a flag of convenience, fairness of the process would be undermined. . . . .
. . . the imposition of exaggerated and unnecessary client loyalty demands . . . may promote form at the expense of substance, and tactical advantage [page741] rather than legitimate protection. . . . Business development strategies have to adapt to legal principles rather than the other way around. Yet it is important to link the duty of loyalty to the policies it is intended to further. An unnecessary expansion of the duty may be as inimical to the proper functioning of the legal system as would its attenuation. The issue always is to determine what rules are sensible and necessary and how best to achieve an appropriate balance among the competing interests.
[14] In my view, this claim of conflict raises the spectre of imposing exaggerated and unnecessary client loyalty demands. If a lawyer’s duty of loyalty can be challenged in these circumstances, this would have serious and unwelcome consequences for access to justice and for the right of a litigant to counsel of his or her choice. This too would impair the integrity of the justice system and has particular implications in class proceedings generally and in securities class actions in particular.
[15] Until recently, there were relatively few securities class actions. Siskinds is among a small number of law firms that are prosecuting them in this new and developing area of law. It has particular and specialized expertise in the investigation of stock option practices of TSX-listed companies. It is the only law firm to have commenced legal proceedings in a Canadian court based wholly or partly upon allegations of options manipulation. It is prepared to invest the time and resources that the nature and scope of this action requires. While Mr. McKenna’s ability to secure counsel of choice in these circumstances is an important consideration, it does not trump the requirement to avoid conflicts of interest: Strother, at para. 62. However, it explains why this motion was brought.
[16] The motion is dismissed with costs. If necessary, I will fix costs upon receipt of brief written submissions within 60 days.
Motion dismissed.